Donations to Accounting History Research Center

1

THE HISTORY OF ACCOUNTING FOR
INCOME TAXES: THE MAJOR ISSUES AND
THE ACTIONS—AN OVERVIEW
by
Roxanne Johnson
University of Baltimore
The current requirements for accoun­ting
for income taxes for external repor­ting
purposes are embodied in Statement
of Financial Accounting Standards
Number 96. Although the date this state­ment
will become a requirement has been
delayed, this particular rule follows a long
line of efforts to deal with and finally and
completely establish the procedures for
such accounting. This extended abstract
details the chronology of events leading
to SFAS #96, and the controversy surroun­ding
its implementation.
This history of accounting for income
taxes begins with Article One of the Con­stitution,
which allows for the collection
of taxes for the payment of debts and the
defense and general welfare of the nation.
In the century that followed the framing
of the Constitution, the U.S. government
imposed income taxes as needed to wage
war, or meet other institutional emergen­cies.
These particular taxes did not
generally outlast the specific events which
caused the pressing need for such funding,
however. In addition, over time, Supreme
Court interpretations of the original wor­ding
in the Constitution limited the
power of the government to impose in­come
taxes. Finally the Sixteenth Amend­ment
to the Constitution, which official­ly
authorized Congress to levy income
taxes, was proposed and ratified, effective
February 25, 1913. [Ratner, 1942]
Since that time, many changes have oc­curred
in the practice of accounting for in­come
taxes. Initially, the accounting pro­fession
concentrated simply on how to
record the tax. Eventually, however, the
nature of the tax became an issue as well.
Over time, the corporate income tax was
identified, alternatively, as a cost of do­ing
business or effective sales tax passed
on to the consuming public, an expense
or charge against income on the income
statement recognized before determining
net income, or a distribution of profits
because the payment of taxes reduced the
dividend available to the investors. The
editor of the Journal of Accountancy con­cluded
that
the question seems to demand further
research and discussion. The issues
have not yet been sufficiently
clarified to warrant any definite con­clusion
at this time.
[Carey, June 1944]
In a symposium published in the Journal
in October 1944, diverse opinions fostered
by the above editorial were presented.
[Symposium, 1944] The discussion pro­mpted
the editor to comment:
It is impossible to appraise the
economic and social effects of the
corporate income tax until its essen­tial
nature and the points of its in­cidence
are recognized. Until then,
also, the proper accounting for this
tax in corporate books and financial
statements will be a subject of
debate.
[Carey, October 1944]
Chronology of Significant Events:
December 1944 — The Committee on
The Accounting Historians Notebook, Spring, 1989 29